Moody’s Sends Shockwaves Through Germany

On Monday, July 23, the credit-rating agency placed the finances of Germany, the Netherlands, and Luxembourg on negative watch. Eurogroup’s president, Jean-Claude Juncker, and Germany’s Minister of Finance, Wolfgang Schäuble, immediately moved to ease concerns, each vouching for the “stability of the Eurozone.”

Moody’s has lowered its financial outlook for Germany, the Netherlands, and Luxembourg from “stable” to “negative”. These three countries still enjoy a triple A, the debt rating that lets them borrow at the lowest rates on the bond markets, but now, given the unfolding crisis in Europe, the agency no longer rules out a future downgrade of these scores.

“Rising risk of a Greek exit from the euro”

Moody’s is concerned that the “burden” of helping troubled countries (Greece, Spain, Italy), shouldered by the most solid countries, may become heavier, spelling difficulties for the latter. In a press release, the agency justifies its Monday decision based on “this rising risk of a Greek exit from the euro,” which may have a very strong “impact” on the zone’s member countries. But, above all, it feels that “Even if such an event is avoided, there is an increasing likelihood that greater collective support for other euro area sovereigns, most notably Spain and Italy, will be required,” a “burden” that would weigh most “heavily” on the states believed to be in the position “to absorb the costs associated with this support”—Germany topping the list.

Moody’s also notes that Germany’s debt now stands at 83.2% of its GDP, and so it believes Germany will have a hard time funding bailout plans for its southern neighbors without endangering its own financial situation. Downgrading its outlook, the agency is hoping to dissuade the country from overcommitting to massive aid packages, like the one the eurozone agreed to provide Spain yesterday.

“Germany will continue to maintain its anchor role in the euro zone”

Reacting to the move, Germany’s finance minister was quick to reaffirm his country’s stability: “Germany will continue to maintain its anchor role in the euro zone” reads a statement released last night. Decrying the agency’s work, Wolfgang Schäuble’s ministry claims it has “taken Moody’s opinion into consideration” while noting that “The euro zone risks that Moody’s mentions are not new.” He adds that “Moody’s assessment is derived mainly from short-term risks, while the longer-term outlook for stabilization goes unmentioned.” Noting that the country should have a balanced budget by 2014, the finance minister asserts that “the very sound state of Germany’s own economy and public finances remains unchanged,” and insists that “The euro zone has already set a number of policies in motion that will steer it to sustainable stabilization.”

For Eurogroup’s president, the fundamentals are strong

On Tuesday Morning, Eurogroup President Jean-Claude Juncker, who is also Luxembourg’s Prime Minister, concurred, expressing his “firm commitment to assuring the stability of the entire Eurozone,” and offering assurance that “the fundamentals” of the three countries in question “and others in the Euro zone” were “strong.” While Moody’s downgraded the outlook for these states and preserved their triple A, Jean-Claude Juncker looked at the matter from a different perspective, saying he takes “note of the rating decision of Moody’s, which confirms the very strong rating enjoyed by a number of euro area member states.”